Chidambaram may stick to Pranab's line on DTC

July 01, 2013 08:27 IST

Idea is to hasten the process; Bill to be tabled in Parliament's monsoon session

Finance Minister P Chidambaram might have modified some of Pranab Mukherjee’s decisions but he could toe his predecessor’s line on the Direct Taxes Code (DTC) Bill. This means taxpayers might continue to enjoy exemption on maturity of their investments and industry could pay Minimum Alternate Tax (MAT) on book profits, instead of gross assets.

Some of Mukherjee’s prominent decisions reviewed by Chidambaram earlier include provisions related to the General Anti-Avoidance Rules (GAAR), tax demand on Vodafone, fiscal deficit target for 2012-13, negotiations with states on the Goods & Services Tax, and norms for selection of public sector bank chiefs.

The DTC Bill, to be tabled in the monsoon session of Parliament, is understood to be closer to the version put up by Mukherjee before Parliament’s standing committee on finance, headed by Yashwant Sinha, in 2010 - that is, a watered down version of the original proposal prepared by Chidambaram during his previous stint finance minister, in 2009.

Officials say Chidambaram is closely working with his advisor, Parthasarathy Shome (the architect of the 2009 version), on the revised Bill. This is likely to give an impetus to growth and investment by the corporate sector but might not have much for individual taxpayers because of the limited fiscal space available with the government.

“The original version of the Bill will need substantive changes. The mandate to the government now is limited to taking a call on standing committee recommendations. We will go with the DTC Bill of 2010, with some modification in line with the panel’s suggestions,” said a finance ministry official who did not wish to be named.

The ministry might not accept the parliamentary panel’s recommendation of raising the yearly income tax exemption limit to Rs 3 lakh from Rs 2 lakh at present. Its worry is that raising this limit will not only lead to loss of revenue (in giving tax benefit to people in all slabs) but also take many people out of its scrutiny and erode the tax base, now already low at 34 million. If the slab is increased to Rs 3 lakh, 87 per cent of taxpayers will escape annual net.

Instead, the government might consider giving relief to taxpayers in the lower tax bracket - like it did in Budget 2013-14. A tax credit of Rs 2,000 was provided to every person with up to Rs 5 lakh the income, benefitting 18 million taxpayers. This meant a hit of Rs 3,600 crore (Rs 36 billion) to the exchequer. But, if the exemption limit is increased to Rs 3 lakh, the loss will be Rs 30,000 crore (Rs 300 billion).

Some widening of slabs could be considered but it might just be marginally higher than the current slabs of Rs 0-2 lakh, Rs 2-5 lakh, Rs 5-10 lakh and Rs 10 lakh & above. The standing committee had suggested four slabs of up to Rs 3 lakh, Rs 3-10 lakh, Rs 10-20 lakh and Rs 20 lakh & above, and said these should move with inflation. But the finance ministry might not accept that. The current rates of 10, 20 and 30 per cent on income tax might not be changed.

The rate of MAT might be kept at book profits, instead of gross assets - as proposed in the original Chidambaram version - and aligned with the current rate of 18.5 per cent. The panel’s recommendations on controlled foreign company (CFC) to tax passive income of foreign entities in a tax haven controlled by Indians might be accepted.

Another official added that the finance minister had made it clear that anything the standing committee had not examined should not be introduced. Moreover, some of the provisions of the original code had to be dropped after opposition from industry; bringing those back would further delay the introduction of the Bill, he added.

“Many small administrative changes will be there. For individuals, it is more of simplification, and for industry, the push will be on reviving investment. There will be changes in language, the structure has been simplified. Rates will be part of DTC and changes will be made after every three-five years,” the official summed up.

Some of the provisions of the DTC Bill, such as the GAAR and Advance Pricing Agreements, have already been incorporated in the Income Tax Act.